A foreign company expanding into Czechia: branch, or subsidiary?

Branch vs. subsidiary

A branch is not a separate legal entity. It is part of the foreign parent company and acts on its behalf. A subsidiary, typically structured as an s.r.o., is a separate legal entity with its own company ID and its own legal existence.

That difference carries through to liability: for a branch, the parent company is liable for its obligations with its entire assets, while for an s.r.o. liability is limited to the assets of the company itself, so business risk in Czechia stays separate from the rest of the group.

It also carries through to administration and setup costs: a branch is generally simpler and cheaper to establish, while an s.r.o. requires registered capital, a founding deed, and registration of a new legal entity in the Commercial Register.

The choice between the two forms should follow your actual plans, not just whichever is easier to set up right now. A branch makes sense for companies that want to test the Czech market first or run only limited activity here with lower administrative costs. A subsidiary pays off where a company expects a long-term presence, larger-scale hiring, or a possible future sale of the Czech part of the business, since it separates out the risk and tends to be a more credible form for business partners and banks alike.

Accounting and tax steps after setup

Income generated through activity in Czechia is taxable there regardless of which form you choose, so both a branch and an s.r.o. must register with the locally competent tax office for income tax. If the company carries out taxable supplies in Czechia, VAT registration follows as well.

Both forms also need Czech bookkeeping set up from the very first day under local rules, along with a Czech bank account, without which day-to-day operations become difficult to manage.

If the company plans to employ people in Czechia, payroll administration has to be in place from the first hire: registration for social security and health insurance, monthly contributions, and benefits set up according to Czech practice. Larger subsidiaries may also face a statutory audit requirement for their financial statements once the company exceeds the legal thresholds for turnover, balance sheet total, or headcount, and it is worth planning for that obligation as early as the first year of operation.

What to watch out for

Beyond choosing the form itself, a few practical details are worth attention once the entity is up and running:

1. Transactions between the Czech branch or subsidiary and the foreign parent, such as invoicing for services, licenses, or loans, need to reflect market conditions, otherwise an audit can result in an additional tax assessment. We covered this in more depth in our transfer pricing article.
2. Tax paid in Czechia is usually credited in the company's home country thanks to a double taxation treaty, though the specific terms always need to be checked against the relevant international agreement.
3. The choice of legal form also affects how easily the Czech part of the business can later be closed, sold, or restructured: a branch is generally easier to wind down, while selling an s.r.o. is a standard transaction with clearly defined rules.

The decision between a branch and a subsidiary depends above all on how long-term and how large-scale your presence on the Czech market is meant to be. At CATO, we help foreign companies through the whole process, from choosing the right form, through registrations, to day-to-day bookkeeping in English.

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